What is Environmental Policy Stringency Index

This chapter explores the impact of environmental policy stringency index (EPS) on FDI inflows in 26 OECD countries for the period 1995-2012. The study employed Durbin-Hausman panel cointegration and Emirmahmutoglu-Kose panel Granger causality tests to determine the long-run and the causal relationship between the relevant variables, respectively. According to findings, variables move together in the long run. On the one hand, in the long run, capital formation and economic globalization increase FDI inflows, while real effective exchange rate, EPS, and non-market EPS decrease these inflows. On the other hand, the coefficients of the parameters are estimated positively for capital formation and negatively for the real effective exchange rate. It was determined that environmental policies cause FDI inflows in 12 out of 26 countries. These empirical findings suggest several courses of action for policymakers.